Reader Question: Paying Off $43,000 on a $37,500 Salary

Today I have a reader question from Matthew in Toronto. Matthew is 32 and has $43,000 in student loan debt at 5.20%. His monthly payments are $485 per month, which is a stretch for him. He currently grosses $37,500 per year at his full-time job and wants to know how he can pay off his debt quicker. He’s (rightly) concerned that being tied to his student loan debt for the next ten years is going to impact his ability to save for retirement, and he wants to get rid of the debt as soon as possible.

Step 1: Looking For Grants and Government Programs

The first step to paying off debt is Googling around to see if there are any government programs or grants available to reduce student loan debt. When doing this, don’t look for programs that reduce your monthly payment. This doesn’t actually help you get out of debt sooner, it just reduces the burden of your student loans if you are in a financial crisis. In fact, those programs usually leave you in debt longer because the lower monthly payments come with a longer loan term, which means you’ll end up paying more interest.

I don’t know what Matthew does, but if he’s a nurse he could qualify for Canada Student Loan Forgiveness for Family Doctors and Nurses, which could help him reduce his student loan debt by up to $20,000 if he’s willing to work in a rural area for four years. As a bonus this would also decrease his living expenses which would allow him to boost his payments.

There are also about 24 programs available through Ontario Student Assistance. I don’t know Matthew’s situation, but it’s possible he qualifies for one of these grants. He mentioned in his email that he already took advantage of the Ontario Student Opportunity Grant but it’s possible there are others he qualifies for.

Step 2: Decreasing Expenses

Beyond grants and bursaries, there is a lot Matthew can do to pay off his debt earlier. At the very least, he can pay it off in five years instead of ten years by increasing his monthly payments to $815.41 from what he’s paying now ($485). That’s a difference of just $330 per month. There are a ton of ways that Matthew could find $330 per month in his budget, including:

Moving to a cheaper city (Toronto is expensive!)

Selling his car and taking public transit or biking to work

Moving to a cheaper apartment with roommates

Stop eating out

Stop buying alcohol

Give up cable and home phone

Stop going to the gym and work out at home

Learn to cut his own hair

These are just a few suggestions on how to frugalize your spending habits, I know my readers could suggest about fifty more. If those suggestions don’t free up $330 in his budget, he could also try and raise his income.

Step 3: Increasing Income

Paying off $43,000 debt on an income of $37,500 is going to be hard. I know this because that’s almost exactly where I started. My first job out of university earned me $38,000 per year and I owed $38,000 in student loans and a car loan. There just wasn’t enough money to pay rent and groceries and pay my debt off quickly. So after reducing my spending as much as possible, I started looking for ways to increase my income.

Here are some tried and true ways to increase your income:

Ask for a raise (Matthew did say this was unlikely, but you never know)

Learn new skills to justify asking for a raise

Volunteer for overtime (if that’s an option, it may not be)

Get a second job, either part-time or freelancing

Ideally you would combine step two and step three, as I did. If Matthew has major success with this step (say he brings in an extra $500 per month), he could also consider using some of that money to start an emergency fund and contribute to his retirement account. I didn’t do that because I was 21 when I was paying off my student loans, but Matthew is 32, and time is of the essence when it comes to benefiting from compound interest.

Matthew specifically told me in his email that he wants to reduce his student loan debt loan without taking years to pay it off or getting a second job, but unfortunately, that may not be possible if he doesn’t qualify for any of the student loan debt reduction grants. Based on the numbers, either you make extra payments, which will require more money, or you don’t, and resign yourself to the fact that you’ll be in debt and contributing much to retirement for a long, long time.

Step 4: Making Lump Sum Payments

Matthew could pay off his debt even faster by making lump sum payments. This could be windfall money like an inheritance, or his income tax return. For example, if Matthew has a yearly income tax return of $1,200, and every year he applies the whole thing to his student loans along with the extra $330 payment per month, he would be debt free in four years nad four months (that’s eight months earlier than if he was making just the extra payments and six years and eight months earlier than he if was making minimum payments).

Speaking of income tax returns, there is one benefit to having student loans: you earn a 15% tax credit on the interest paid. You can also claim a full-time education credit in the amount of $400 for each whole or part month in the year in which you were enrolled in a qualifying program at a designated school, and a non-refundable textbook tax credit of $65 for each month you were enrolled in a course that entitles you to a full-time education tax credit. You can find out more about that at CanLearn.ca.

Using this plan, Matthew should be able to pay off his debt in four years and four months without student loan forgiveness. At that point, he’ll be 36, and it’ll be time to ramp up his retirement savings. Fortunately, the discipline he’ll develop from paying large amounts of cash toward his debt will help him build up his retirement fund equally speedily.

What do you think folks? Does this plan sound doable? Do you have any advice for Matthew?

Stay Up To Date

At 5.2% he’s right around that range where it may make sense to throw extra income into retirement accounts now or other investments which may net him a higher return. It’s another option where the growth from investments can then be used to pay down the debt, or continue earning money on it’s own. It’s a balancing act for sure. I wish my percentage was lower: at 6.125% I feel most comfortable paying off the debt asap.

Hey Andy! That is a great point, Matthew specifically emailed me asking for information on how to pay his debt off, but starting to invest a small amount in addition to paying off his debt is definitely a good idea given his age.

Emily Henderson

I’m interested to see other’s responses. I was in almost the same situation with my first job in Toronto, but was already taking transit, living cheaply with roommates, no cable/home phone or gym membership and rarely went out. I owed less but was trying to pay it off fast and struggling to put $500 on my loan every month. It wasn’t until I changed jobs (and took an 18% pay increase in the process) that I was able to bump my payments up to $800.

It sounds lil you followed the prescribed plan pretty closely! Decrease expenses while doing whatever necessary to increase income. It’s not fun but sometimes it’s necessary. Congrats on the 18% raise, that is impressive!

Cat Alford/ Budget Blonde

Good tips! I think you covered everything I would’ve suggested too. 🙂 I hope he gets them paid off ASAP. Student loans are such a pain and can really hold you back from other things you want to pursue.

I can’t really speak from experience (I’ve been lucky to not have student debt), but the tips that you share here all sound pretty reasonable to me, and I think that Matthew should be able to put together a reasonable plan with what you have laid out here, provided that he is motivated enough to make the needed sacrifices.

Solid advice. The extra income + income tax refunds is really the key here. Even if he can bring in $200 extra per month on a side hustle, that would shave years and years off his debt repayment. Income tax refund of $3,000 would wipe out nearly 10% in one go. His situation isn’t as dire as it probably feels — it’s a stretch, but the first year is the worst!

You make an excellent point here Bridget. Windfall money and being able to wipe out large amounts of debt all at once is so important to maintaining enthusiasm for the overall debt repayment plan. Extra income is also important, because it’s variable, so every dollar you earn feels like “bonus money” that is giving you an extra boost in momentum.

I think that these practical suggestions — avoiding alcohol and eating out, moving to a cheaper apartment, etc. — are fantastic ideas, and ones that really will add up over time. It’s astonishing how much small amounts of money add up over the course of 3 or 6 or 12 months. I also think that if it’s possible to turn these changes into a sort of challenge, or game, this would be ideal. (Games are way more fun than feeling deprived, and much more motivating too!) 🙂

I definitely gameified my debt repayment, so that I didn’t get too sad about the fact that I was living in a 400 square foot cottage or agonizing over spending $10 at the drugstore. I made it a challenge to see how far I could go and if I could ‘beat’ my pervious frugal or debt paying personal bests.

Giulia Lombardo

This post is rich of informations and tips for a good debt repayment, I feel very lucky to be debt free but having financial goals to achieve is always better knows more opinion and ways to pay/ save more 😀 thanks for sharing!!!

Latoya S

You’ve basically outlined everything I would have suggested. I’m 31 and I’m in the same boat he is except my student loan balance is $79,000! It has grown 11 percent since I graduated with my MBA. I plan to pay as much as I can in the next 5 years by increasing income through freelancing. It’s the only way I’ll be able to knock it out of the water because I want to be debt free before 38 so I can contribute more towards retirement and my kid’s college funds.

It sounds like you’ve come up with a plan that is totally doable. That’s a lot of debt, but you seem very committed.

Taylor Milam

I love all of your advice! As others have said, the first few months/year are definitely the hardest, but it will be over in no time. Ultimately, the key is creating a life that is frugal yet livable. It’s important not to cut so much that it’s unsustainable in the long run, especially when he’s looking at 4+ years of payments. Also, side hustles are the BEST and they are so manageable. I only work about 4 hours a month on mine and earn an extra $300. They don’t have to be overwhelming or extreme, but every little bit helps!

I’m assuming that Matt has the $485/month payment easily available to throw into his debt and living budget-style. In case he’s reading comments, I’d like to share my strategy of paying weekly. Based on current standing, if he paid $111/week (($485×12)/52), it’d take 491 weeks (9.5 years). If paying more, it would take him faster of course. I chose weekly payments because of a few reasons: it allows me to see predictable interest amounts (after all, interest is calculated daily), it forces me to prioritize it every week, and it’s easier to apply additional payments without waiting for the next fortnight/month. I found a fortnight too long as I could have $20 extra and it may be used before the next payment. With only 7 days in between payments, it’s easier to hold on to the extra money for a few days. Plus, I was able to “experiment” with bigger payments and see what life became of it; and if it didn’t work out, it was easy to roll back to previous payments (fail fast mantra).

This method may not work for many people because it’s too micro, but the small wins have kept me motivated. I realized that while I don’t micromanage people, it’s the opposite when it comes to money for me. 🙂 Hope this was useful. I used http://www.mycalculators.com/ca/wloanm.html for numbers above.

That’s an interesting strategy Cee, I did something similar to that. I added my student loans as a bill in my online banking. So I had my preauthorized monthly payment of $301, but I would also pay $80 weekly from my weekly paycheque. On top of that, anytime I had extra cash, I would also make a quick payment of $20 or $50 or whatever. I liked my method because it kept my monthly payment low in case something bad happened and I couldn’t pay my bills (I basically live in perpetual fear of that).

AB

Hey Matthew/Jordann,

I was in the same boat with salary range and OSAP. I’m not sure this will apply to you but I sure hope it does. Here’s what I did:

I stayed on Repayment Assistance Program (RAP) as long as I could (which was a LONG time). Through RAP, NSLSC sets an “affordable” monthly payment based on your income and amount owed. RAP-adjusted payments can be as low as zero monthly payments – in this case, the government covers your interest payments and your balance stays put. Depending on your income/loan amount, the payment may be entirely directed to your balance (and the govt pays your interest) or mostly to your balance with a portion to interest (and again, the govt pays the balance of your interest). Based on the numbers Jordann shared, it sounds like you’re not currently on RAP. I’d suggest applying immediately – you can apply after the 6-month grace period following school completion has finished. Here’s an estimator tool to see what you’d likely be paying: http://tools.canlearn.ca/cslgs-scpse/cln-cln/rae-ear/rae-ear-1-eng.do – I tried it with what info I had from your story and it sounds like your monthly payment would be $317. I always found my monthly payment with RAP was lower than what the estimator said. Note that they look at household income – so if you’re married, your spouse’s income will be considered here, which might not help you out. And you have to reapply for RAP every 6 months. They’ll remind you, sometimes, but they won’t automatically renew your status.

I mentioned I was on RAP for a long time. For a while I made zero payments, and then I made small payments, and they slowly increased as my income grew. I only started making interest payments in the last 6-month period (to the tune of $30/month, which was peanuts considering my daily interest charge was almost $5). During this this time I saved a ton in preparation for the day I would have to start making regular payments (I work in non-profit, so I knew it’d take a while;)). I saved the monthly payment amount, plus every windfall (usually in the form of tax returns) went to this savings account. I was very, very strict with my spending and managed to save money while living on, at one point, less than $30k gross in Toronto. I tracked all my spending – every penny – and biked everywhere, year round and was very mindful about how much money went to eating/drinking out. (I also have a dog and a car, which I bring up because I get it, life costs money. But there are ways! Even in TO!)

I could’ve been making payments instead of saving the money for a balloon payment down the road, but that would’ve brought my loan amount down and I didn’t want to lose the RAP status while I could still benefit from it, especially since it allowed me to not pay interest on the loan. Eventually I felt comfortable enough to shift around my savings (eg into an emergency fund etc).

I recently switched jobs and knew my love affair with RAP was up. I made a $21000 payment on my loan right before the end of my final RAP segment and planned out a payment plan to knock the rest of it out within a year, without touching my emergency fund. Had I followed NSLSC’s 9.5 year payment plan, I would’ve paid about $10k in interest. Instead, I’ll end up paying less than $500 in interest over the entire life of the loan.

I hate to just repeat what has already been well articulated in PF blogs like Jordann’s, but I absolutely believe all you need is a financial plan. It’s intimidating at first but then empowering and liberating as hell once you figure out how to manage it. Good luck!

Des @ Half Banked

Oh my gosh, if there’s *one thing* I wish someone had told me when I graduated into a job paying $37K, it’s that you can – and should – have a side hustle or part-time job. I was in the same boat where a raise and overtime were just not options, but other income streams would have been a huge help at that stage. It’s just not something that’s talked about enough, especially right after you graduate into a “professional” job.